Value stocks will outperform

Looking at the current balance sheet size of the People’s Bank of China, it has increased from the same period last year, but it has not continued to expand since the beginning of 2020. The People’s Bank of China is the most calm and restrained, not buying and buying on the open market like its global counterparts. What is the central bank of China waiting for?

It can be said that China is the first country to recover from the new crown epidemic, and this epidemic just hit the Chinese economy during the off-season of the Spring Festival. Recent high-frequency data show that the economic recovery is proceeding smoothly, and the manufacturing capacity utilization rate has basically returned to normal levels. The pace of recovery in the service industry is relatively slow. China’s financial markets have withstood this global storm. Therefore, it seems that the People’s Bank of China does not need to intervene on the Chinese financial market on a large scale, but is trying to ease the liquidity of the real economy.

How the performance of the Shanghai Composite Index is highly correlated with changes in market value and GDP ratio. What’s more interesting is that the change in this ratio has stayed in a very clear range for the past 10 years-that is, between +7% and -20%. Historically, as long as the year-on-year change in the market value and GDP ratio reached 7%, the Shanghai Composite Index would encounter resistance; and as long as the year-on-year change in this ratio fell to -20%, the Shanghai Composite Index would find support, or even bottomed out— —Except for the 2015 stock market bubble.

Since the global financial crisis in 2008, the Chinese economy has been expanding at an average growth rate of about 7%. Since GDP is released quarterly, and the market value to GDP ratio is calculated based on daily stock prices, when this ratio changes by more than 7%, it indicates that the market is growing faster than the potential economic growth rate. Therefore, the Shanghai Composite Index will encounter resistance. But when the change in this ratio drops to -20% or even lower, it means that the market is cheap enough to reflect the underlying economic difficulties.

At present, the change in market value and GDP ratio is still rising, but has not yet reached the 7% limit. In the past 7 months, the actual trading range of the Shanghai Composite Index was 2646 to 3127 points. If the Shanghai Composite Index is close to the lower edge of this range, investment should take the initiative and vice versa.

In February 2020, the performance of the Shanghai Composite Index relative to the S&P 500 Index once again reached historical extreme levels. Although this relative performance was driven by relative valuation, at the beginning of the comparison period, the actual index levels of the two indexes were roughly around 1000 points. This coincidence makes it very convenient to compare the relative performance of these two indices. The poor performance of the Shanghai Stock Exchange relative to the S&P now means that the performance between the two indexes will return to the mean, just like historical precedent, especially in 2005 when the Shanghai stock index fell below 1,000 points. Therefore, in the long run, the Shanghai Composite Index will outperform the S&P 500 index. Long-term investors should start paying attention to the long-term investment value of SSE.

At the same time, the Hong Kong Hang Seng Index is also at a critical time.

Since the beginning of 2018, a series of unfavorable factors affecting the operation of the Hong Kong market, such as trade wars, social events, and the new crown epidemic have emerged. During the global stock market crash in March 2020, the Hang Seng Index fell to a minimum of 21,139 points, and has found support since then.

Generally speaking, 2-3 3.5-year short cycles form a 7-11 year intermediate cycle. Five short 3.5-year cycles form a 17.5-year medium cycle, while two 17.5-year medium cycles are equivalent to a 35-year long cycle. Simply put, the long-term moving average of market prices reflects changes in the economic cycle. The length of time to calculate the market moving average should be consistent with the duration of the economic cycle.

The 10.5 and 17.5 long-term moving averages of the Hang Seng Index are important support levels for the index. The window length of these moving averages coincides with the duration of the cycle in the economy. We have discovered and verified this trading principle in many major market indexes, including the Shanghai Composite Index, S&P 500 Index and Dow Jones Index. This is no coincidence.

During the plunge in March, the lowest point of the Hang Seng Index was only about 100 points away from its 17.5-year long-term moving average, but it is now hovering around the 10.5-year moving average. Therefore, in the current cycle, the lowest point in March is a significant low; even if the uncertainty continues to rise, the HSI is unlikely to fall below this low again. In addition, the valuation of the Hang Seng Index is at a historical low, and long-term investors should also pay attention to the HSI. This will be a good long-term investment.